Freezing a pension

ChrisBristol

I've currently got a personal pension that I've been paying into for over twenty years; as well as payments I've made, it's also got money I was able to transfer from an old company scheme (which was generous - the company paid in more than I did). So, I don't have any frozen funds from other schemes - just this one Friends Provident Stewardship pension.

I had been paying £300 into it for a long time, but reduced it to £150 per month a few years ago (I actually pay £117, but apparently that's worth £150 to the scheme).

Now, I'm currently in a position where income has dried up for a while, so I'd like to suspend payments for a while. I've got two questions:

1. Given that interest rates are so low at the moment, is it sensible to stop paying this money for, say, 12 months?

2. On a longer term note, when I can afford to make payments into the scheme again, is it actually worth doing so? Would there be mileage in simply freezing the pension (the fund is currently worth £66,000), and when I'm earning a reasonable amount again to then start paying that into a basket of savings schemes (not pensions) so that I can spread my risk and get the best deals? I realise that anything above the ISA level won't be tax-free, but if I'm looking to invest between £3000 and £5000 a year, does the loss of tax-free status outweigh the various charges that the big pension companies make?

I'm opted out of SERPS currently, by the way.

Any suggestions gratefully received

Chris.

dunstonh

1. Given that interest rates are so low at the moment, is it sensible to stop paying this money for, say, 12 months?

Unless you have cash fund investments, interest rates have little to do with the pension itself.

2. On a longer term note, when I can afford to make payments into the scheme again, is it actually worth doing so?

A pension plan is like any other savings plan. The more you pay in, the more you will get back.

and when I'm earning a reasonable amount again to then start paying that into a basket of savings schemes (not pensions) so that I can spread my risk and get the best deals?

A pension is like any other investment that you can select a range of investment areas to spread your risk.

I realise that anything above the ISA level won't be tax-free

It will be in pensions.

does the loss of tax-free status outweigh the various charges that the big pension companies make?

Charges on pensions are little different and actually, on standard terms, often lower than ISAs/UTs and Oeics.

Things have moved on a long way since the single fund pension product charging tons for the benefit (of nothing).

ISAs and Pensions are both suitable for retirement planning. Both have their pros and cons and depending on what you are looking for and how you want the money paid will depend on what option you go for. Risk and investment funds are totally a non issue as the same funds available for ISAs are available for pensions. Usually a combination of ISAs and pensions is a good idea. As is sorting your retirement planning equally between husband/wife/partner.

EdInvestor

Hello ChrisBristol

If you want to leave it for a while you might be better to transfer the pension into an online Self Invested Pension Fund (SIPP) with no annual management fee. That way you get access to all the best quality funds to put the money into an pay no annual management charge.

Sippdeal, Alliance Trust and EPML are providers who do these new cheap SIPPs. As you fund has protected rights money in it, your best bet is probably EPML, which does a separate pension for the contracted out money (you're not allowed to put this money in a SIPP at present.)

http://www.epml.co.uk/

Very cost effective for a larger fund like yours.

If you wanted to hedge your bets you could move the main fund to the SIPP and leave the contracted out money in the Friends Prov plan (but do check what charges you're paying if you've had the pension a long time.What is it invested in? I hope it's not still in the With profits fund )

The Sippdeal website gives a good explanation about SIPPS and how they work.
https://www.sippdeal.co.uk

I would also build up money side by side in ISAs, which are much less restrictive than pensions.The annual maxi ISA allowance of 7k is more than enough to cover your plans. Again do look for low charges: for instance the broker Squaregain (formerly Comdirect) will only charge you 25 pounds a year for an ISA, and again give you access to all the best funds, or direct investment in shares.

ChrisBristol

Thank you both for your replies! I realise that interest rates aren't the only measure of how quickly a pension grows, but it must relate to an extent - my pension fund grew much more quickly in the 80s and late 90s than it is now.

When I talked of spreading my risk, what I meant was that my main concern is what happens if FP were to suddenly go down the pan? I know there was another big company recently where savers suddenly found they'd lost out - I'm a little worried about having a large fund with one company. I'd like to spread my risk across several large companies ideally - so I'll certainly check out the SIPP site, thanks Ed!

dunstonh

Ed, A stakeholder/personal pension can be cheaper than the SIPP with that sort of fund balance.

Also, at this stage, Chris doesnt appear to have the investment experiance required to handle a SIPP. (not a dig because most don't).

I realise that interest rates aren't the only measure of how quickly a pension grows, but it must relate to an extent - my pension fund grew much more quickly in the 80s and late 90s than it is now.

Pensions have a range of investment funds available. The number will depend on the provider. FP, on their current product, have a good range and their low risk funds, in particular, are pretty good. The funds range from the basic low risk cash fund right upto higher risk funds investing in the Far East and the US. Depending on the portfolio of funds you selected, performace will depend on that.

In the 90s, the stockmarket didnt suffer a major long term crash. We had one a few years ago which is now recovering. So any fund with stockmarket linking would be lower.

You need to separate the pension as the product and the area that you invest. They are two different things. The SIPP may be an option but you may find it more expensive than a stakeholder pension and depending on the pension you already have, you may find that has more favourable terms. It could also have worse terms.

SIPPS are designed for the experienced investor or someone that has an IFA advising them. Your posts do suggest you dont have that experience yet and I fear that jumping straight into a SIPP without knowing how they work and how different funds perform and what risk is associated with them would not be the best thing for you at this stage.

Ed is not an advisor and constantly promotes SIPPs as the answer for everyone. Technology and understanding is not sufficient yet for them to be the answer for everyone. SIPPs charge for doing transactions. They also charge for using services. If you do not use those services and do transactions in a certain way to limit the charges then you could save money. You can invest in an almost limitless number of areas and there will be charges on those as well.

A modern personal pension/stakeholder pension has a much clearer charging structure with most just charging a flat annual management charge. This is usally around the 1% mark.

EdInvestor

SIPPS are designed for the experienced investor or someone that has an IFA advising them.


This used to be the case, but it isn't any more, since the advent of online SIPPs.If you want to run a SIPP like an ordinary pension - ie move the money in, pick two or three funds , buy them, and then just leave it, it will cost you virtually nothing to run, much cheaper than a pension because there's no annual fee. An annual fee of 1% adds up to between 20% and 30% of your fund over 25 years. :eek:

If you buy and sell a lot (whether funds or individual shares) then your charges will be higher of course, and care is needed with regular contributions to make sure costs are contained.But the fees and charges are all clearly laid out and easy to understand and my experience of the office staff at my SIPP with queries is excellent - very helpful and it's all clear and efficient - unlike the competition in many cases :rolleyes:

For people with established funds (particularly old frozen personal pensions) SIPPs are the money saving option in the pensions field.

dunstonh

This used to be the case, but it isn't any more, since the advent of online SIPPs.If you want to run a SIPP like an ordinary pension - ie move the money in, pick two or three funds , buy them, and then just leave it, it will cost you virtually nothing to run, much cheaper than a pension because there's no annual fee. An annual fee of 1% adds up to between 20% and 30% of your fund over 25 years. :eek:

That annual fee of 1% is the only fee. By the time you include a 0.1 or 0.2% discount based on 60k funds, you are looking at 0.8%p.a.

Your option includes fees for running the SIPP and then further annual management charges on the funds selected. You seem to be totally ignoring the annual management charges on the funds in the SIPP.

I could be wrong but based on what is posted so far, ChrisB doesnt appear to know about investment funds. I base that observation on the reference to interest rates. That it not whom the SIPP is designed for.

You need to look at all the fees involved. Not just be selective with a few on the SIPP and ignore the rest.

ChrisBristol

Thanks, Dunston - you're quite right, I don't have that much experience in investment funds; I had a few bonds in the 90s and an IFA whose advice wasn't really terribly helpful. I'm pretty happy with the performance of my pension fund in general (my IFA in the 80s advised me against going for the Stewardship fund because as an ethical fund it was "just a gimmick and wouldn't do well" - it turned out to be one of their better performing funds), but my worry with a pension fund is twofold: firstly, that I can't touch the money until I retire; secondly, that my eggs are all in one basket. What happens if FP get into trouble as a company? Presumably, I could risk losing a substantial proportion of my money.

So what I'm really asking is: if instead of paying in to FP for another twenty years, I freeze that fund and start paying into an ISA instead (I can invest £7,000 per year presumably?) then I'd have two funds - the frozen one, and the ISA - which is spreading the risk (and allows me earlier access to some of the money if I need it, for example to do repairs on my house). Would that be a sensible option, or would the value of the frozen fund plus the ISA be likely to be far less than the pension fund if I carry on paying into that?

Chris.

EdInvestor

Hi Chris

..would the value of the frozen fund plus the ISA be likely to be far less than the pension fund if I carry on paying into that?

The pension and the ISA are just tax wrappers.It's the performance of the funds, shares or other assets that you invest the money into that determines the performance (along with the charges of course).

With a standard ordinary pension you can only invest in funds (and often only funds from one company for the cheap pensions).With a SIPP pension you can invest directly in shares, in a much bigger range of funds,including the best performers, and soon, residential property.An ISA is the same as the SIPP minus the residential property.

Perhaps you'd like to post which funds the FP pension is invested in and what charges you're paying?

Problems with the pensions:
firstly, that I can't touch the money until I retire; secondly, that my eggs are all in one basket. What happens if FP get into trouble as a company? Presumably, I could risk losing a substantial proportion of my money.

Problem 1, the inflexibity, is indeed unfixable, and that would indicate you move to an ISA for new money.

Your money is protected at FP, no need for cencern about that.It's at mutuals where there can be problems for With profits investors, but the regulator has moved to fix that problem in the wake of the near collapse of Equitable Life. In any case FP is no longer a mutual - hope you got a decent windfall

ChrisBristol

EdInvestor wrote:

The pension and the ISA are just tax wrappers.It's the performance of the funds, shares or other assets that you invest the money into that determines the performance (along with the charges of course).

Thanks, Ed - that makes sense - I was wondering if it was one of those things where once you've spent twenty years investing, the returns are much greater later on (eg because most of the charges are taken out in the first ten years or whatever). If not, I'd be much happier splitting as you suggest.

Perhaps you'd like to post which funds the FP pension is invested in and what charges you're paying?

I'll find out the charges. The fund is the Stewardship Fund, which is an ethically-based one (eg invests in environmental, fair trade etc).

Problem 1, the inflexibity, is indeed unfixable, and that would indicate you move to an ISA for new money.

Yes, that's what I was thinking - thanks for clarifying!

Your money is protected at FP, no need for cencern about that.It's at mutuals where there can be problems for With profits investors, but the regulator has moved to fix that problem in the wake of the near collapse of Equitable Life.

Yes, that was my worry

In any case FP is no longer a mutual - hope you got a decent windfall

Just the standard shares - it wasn't based on number of years with them or the amount (unfortunately!)

EdInvestor

ChrisBristol wrote:

I'll find out the charges. The fund is the Stewardship Fund, which is an ethically-based one (eg invests in environmental, fair trade etc).

One of these then (see Nos 1185-87):

FP Stewardship pension funds

You may like to compare the performance with the ethical fund available from FP's fund management company,F&C,which you would get in an ISA (No 11):

F&C Stewardship Income fund

Note particularly the performance of the respective funds over 5 years, which covers the market crash.

It's unfortunately often the case that the best-performing funds are not available in the standard insured personal pension wrapper. While this is improving, you get charged extra for the good funds of course.:(